The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (H.R. 748) provides for forgivable loans administered by the Small Business Administration (SBA) under the Paycheck Protection Program (PPP) and a refundable payroll tax credit for "employee retention" costs (the employee retention tax credit). The employee retention tax credit is not available to employers that receive loans under the PPP of the CARES Act. If an employer takes the employee retention tax credit and obtains a PPP loan, the tax credit must be recaptured and paid back to the Internal Revenue Service (IRS). Because a business cannot receive both a PPP loan and an employee retention tax credit, all facts and circumstances and the respective economic benefits of each program should be weighed and considered before determining which program is the best fit for a particular business.
Forgivable PPP Loan
PPP loans are generally available only to businesses that employ 500 or fewer employees. Certain affiliation rules apply for purposes of determining the number of employees. The full principal amount of PPP loans may qualify for loan forgiveness. In general, the PPP allows loan forgiveness for certain expenses incurred and payments made during the "covered period" (i.e., the eight-week period commencing on the date the borrower receives its loan proceeds), including: (i) certain covered payroll costs; (ii) certain covered rent payments; (iii) certain covered utilities, and (iv) interest payments on certain debts. Since adoption of the loan program, the SBA has issued additional guidance that imposes revised criteria on borrowers regarding proof of need for the loan. Additionally, the IRS has recently announced that taxpayers may not deduct wages or expenses paid with forgiven PPP loan funds. Further information regarding PPP loan qualification and requirements for loan forgiveness are discussed in greater detail here.
Employee Retention Tax Credit
Alternatively, the CARES Act provides a refundable payroll tax credit for 50 percent of "qualifying wages" paid by "qualifying employers" to employees between March 13, 2020, and Dec. 31, 2020. To qualify, the employer must be operating a trade or business in the United States or conducting non-profit activities as a 501(c) tax-exempt organization and (i) have operations that are partially or fully suspended due to COVID-19, or (ii) have a decline on gross receipts by more than 50 percent compared to the prior year, measured by the calendar quarter. If only the gross receipts test under (ii) is satisfied, the eligibility for the credit will terminate when gross receipts reach 80 percent of the prior year gross receipts for the applicable quarter. Qualifying wages for employers with 100 or less full-time employees include all wages. For larger employers, it includes only wages paid to employees who are not providing services “due” to COVID-19. Aggregation rules apply for purposes of determining the number of employees. In all cases, qualifying wages are capped at the first $10,000 (including health benefits) paid to an employee (i.e., there is a $5,000 maximum tax credit per employee). While the IRS previously stated that employers cannot claim the credit for health care benefits and expenses they continue to pay on behalf of employees if they are not paying any other wages to the employees, the IRS reversed its position after bipartisan Congressional objection to that position. Accordingly, the IRS now states that employers can claim the credit for health care benefits and expenses they continue to pay on behalf of employees even if they are not paying any other wages to the employees.
As reflected by the summary above, in determining whether to obtain a PPP loan or claim the employee retention tax credit, employers must consider numerous factors. Taft lawyers are available to assist you in making the appropriate decision.
For further information, please contact any member of Taft’s Tax Practice Group.